Can China share out the wealth ?

China now has the world’s second biggest economy, though its actual GDP per capita is much less than Tunisia’s. But sharing the wealth and securing it for the future, while fulfilling pent-up domestic demand, represent a great challenge for China

par Martine Bulard,
avril 2011

The Japanese rather than the Chinese government broke the news that in 2010 China had become the world’s second-largest economic power, ahead of Japan. Chinese officials, not usually given to modesty, were not triumphant, as China is keen to keep its dual status of “developing country” and “rising superpower”, allowing it to play different roles in various international organisations. With a gross domestic product of $5.9 trillion, China is still far behind the United States, which produces two-and-a-half times more. China’s actual GDP per capita of $7,400 [1] is almost five times less than Japan’s – much less even than Tunisia’s.

And yet China is powerful in finance (reserves of $2.8 trillion), industry (almost 14% of the world’s industrial added value, compared to 3% in 1990), trade (10%) and the military (it ranks third in expenditure). This is changing the world order. For a long time, the US only saw it as a “workshop of the world”, useful for constraining US salaries and increasing profits. Today it realises that China is a competitor on the political and economic level (see China goes into the world news business). The honeymoon that began in 1972 with US president Richard Nixon’s visit to Beijing is over.

The Financial Times noted some believe “the US is in danger of re-engaging in Asia on acrimonious terms ... you do not need to be a paranoid conspiracy theorist to think that the US is trying to bandwagon Asia against China”. It recalled the declaration by Secretary of State Hillary Clinton on her visit to Phnom Penh, when she advised Cambodia “not to become too dependent on China”. As a Chinese official remarked, “Can you imagine the Chinese government telling Mexico not to be too dependent on the US ?” [2].

Last November President Barack Obama toured Asia, visiting Japan, whose relationship with China is strained ; South Korea, at loggerheads with the North, Beijing’s ally ; Indonesia, which controls the Malacca Straits, a vital route for Chinese trade ; and India, which has strong tensions with China. Clinton had previously visited Cambodia, Malaysia, Vietnam and Australia, and signed (or strengthened) military agreements. Last November and December, joint US-South Korean manoeuvres took place off the Chinese coast. The US is using the fear aroused by China’s increase in power to regain control of the region. All this will feed China’s paranoia and push it to react. We are far from the “special China-US relationship” known as Chiamerica that was supposed to characterise the start of the 21st century. It is a relationship that is neither entente cordiale nor open war, but one in which divergent interests do not prevent cooperation. It is “conflictual cooperation”.

The General Electric group announced in January that it had signed agreements on coproduction and technology transfer to China, just as Obama was criticising the countries’ trade imbalance in front of President Hu Jintao. The agreements were concerned with meeting China’s domestic needs, but also production of goods for re-export. Half of Chinese sales abroad are controlled by companies that are not Chinese – companies opposed to a revaluation of the yuan, because it would make their exports more expensive. Meanwhile, General Electric’s CEO Jeff Immelt has become chief economic adviser to the White House, chairing the Council on Jobs and Competitiveness. Chinese business circles can rest easy.

Export more to China

Hu went so far as to invite the US to export more to China. The ministry of commerce claimed that “restrictions on hi-tech exports to China, rather than the Chinese currency, are the ‘major source’ of the US trade deficit” [3]. Only 7% of Chinese imports of hi-tech products come from the US. Since Tiananmen Square in 1989, the US and Europe have imposed an embargo on dual-use technologies (usable in both civilian and military industries). China wants that to end and has turned it into a commercial argument, while looking to assert itself in hi-tech. Chinese leaders are deaf to US (and European) pressure to revalue the yuan and lift exchange controls. They recall that Japan gave in to such pressure in 1985, and in the following three years, the yen appreciated by 100% against the dollar. Japanese export figures tumbled, relocations (especially to China) soared, and the economy slumped. And it hasn’t yet recovered.

China is apprehensive about this. It rebuffed France, the US and the International Monetary Fund, which had intended to impose “good conduct” criteria at the meeting of the G20 finance ministers in Paris in February. China was supported by Germany, whose model is also focused on exports. Germany, which has a balance of payments surplus of 6.7% of GDP [4] compared to China’s 4.7%, rejected any cap on surpluses. During his US trip in January, Hu said : “The monetary policy of the United States has a major impact on global liquidity and capital flows and, therefore, the liquidity of the US dollar should be kept at a reasonable and stable level” [5]. He was referring to the US Federal Reserve, which has injected $600bn into the economy while giving little support to the social sector. Low salaries and social security payments, and excess accumulated capital, were at the root of the 2008 crisis. But the US is priming the finance pump again.

This flood of liquidity has been feeding speculation on national debt in countries with high interest rates. To repay this debt, governments and the IMF are pushing for austerity measures everywhere. Capital has also been channelled into commodities (gold, oil, copper) and foodstuffs. Their prices have reached new heights, worrying the World Bank, which fears repeated food riots. Investors have rushed to buy currencies and stocks. Countries must intervene to avoid a revaluation of their currency, which would handicap their foreign sales. China’s crusade against this “dangerous disequilibrium” has been a real success in Asia (where Japan, Malaysia, South Korea and Taiwan have spent crazy amounts on buying dollars) and in Latin America (where Brazil now taxes capital entering the country). On the margins of the Paris G20, the BRIC countries (Brazil, Russia, India and China) protested against the norms that others wanted to impose on them. So far, the US and its allies have not managed to rally the South against the Chinese leadership, which, however, knows it will have to negotiate, domestically and internationally.

In Paris, China and Brazil were in agreement against the rich countries’ claims. In Brasília, they confronted each other over the flood of Chinese products. If China wants to carry weight in the currency market, it needs an internationally recognised (and convertible) currency. Ending exchange controls is not the only way of achieving this. France, after all, kept its controls until 1989.

The Chinese authorities have now lifted certain prohibitions. On 11 January they extended the possibility of yuan transactions, already available in Brazil, Russia and some East Asian countries, to Central Asian countries. And they allowed multinationals such as McDonald’s and Caterpillar to issue shares directly in yuan on the Hong Kong stock market. Simultaneously, they restricted the right of foreigners to buy commercial and residential property. “If we do not control the property bubble, let a stock bubble inflate and allow the yuen to rise freely, China will face the risk of large-scale cross-border capital flows,” said Deng Xianhong, the deputy administrator of China’s State Administration of Foreign Exchange [6].

Judging the pace of foreign exchange

The governor of the central bank, Zhou Xiaochuan, said the yuan had already risen by 4% against the dollar since last summer, an (unprecedented) annual rate of 8-10%, and that China would continue to improve its foreign-exchange system, but at its own pace [7]. That pace must not compromise domestic growth in a country needing to create 9m jobs each year, nor can the economy be allowed to boil over. The government has already taken measures against the rise in prices, which has affected food (and therefore purchasing power), as well as imported raw materials. Since an appreciation of the yuan might partly compensate for this, the current revaluation comes at the right moment. But it will make exports more expensive, when the trade surplus already decreased by almost 7% last year, proof of a certain level of Chinese consumer dynamism.

There is also a risk of excessive borrowing. The government is trying to turn off the loans tap so as to limit wasteful investment and control the real-estate bubble. For the third time in four months, it has raised interest rates and bank reserve requirements ; and it has established a resale tax on apartments not intended for personal use. But this shift toward a model more frugal with capital and centred on domestic needs has been difficult to negotiate. According to Zhou, the change “will take a long time. It will require a radical transformation of modes of production and adequate training for workers... This kind of cycle takes a decade” [8].

It is not clear whether the Chinese are willing to wait that long. Discontent is growing, as is the struggle for salary increases. Injustices are beginning to irritate the middle classes, previously obsessed with their own accumulation of wealth. Liu Junsheng, a researcher at an institute under the control of the Ministry of Human Resources and Social Security, wrote a piece in the official newspaper China Daily saying that raising workers’ pay was vital for China. Pointing to inequalities, it concluded by inverting the famous government slogan : “This is certainly incompatible with China’s aim of building a harmonious society” [9]. In 2010, the number of Chinese dollar billionaires jumped from 64 (in 2009) to 115.

Hu warned the cadres of the Party School of the Central Committee of the Communist Party that the country was “still at a stage where many conflicts are likely to arise” [10]. The twelfth five-year plan (2011-16) is testimony to such concerns : it addresses consumption, housing, the social welfare system, and innovation. At the end of National People’s Congress (NPC) on 11 March, Wen said : “I believe two figures are more important than GDP” – education and research and development in the whole production process. The 5-year plan states : “Building a fairer society has been a core goal of the government which has worked to spread the wealth more evenly among its around 1.34 billion population, but income increases have lagged behind economic growth.”

The plan was approved by the legislature, the NPC, with 2,778 out of 2,875 deputies voting for it. Adopting the plan is one thing : implementing it is another.

P.-S.

Translated by Tom Genrich

Martine Bulard is editor in chief of Le Monde diplomatique

[1] GDP per inhabitant at purchasing power parity. In 2010 estimates were $34,200 for Japan and $9,500 for Tunisia. Central Intelligence Agency, The World Factbook.